RIM swoons on analyst's call for its downsizing

TORONTO, June 25 (Reuters) - Shares of Research In Motion fell more than 7 percent on Monday after aMorgan Stanley analyst said the BlackBerry maker would have toshrink considerably to survive.

The transformation would erase much of RIM's earnings power, Morgan Stanley analyst Ehud Gelblum said in a note to investorsin which he downgraded RIM to "underweight" from "equal weight."

"We believe the fundamental story at RIM is essentiallybroken," Gelblum said. "The most likely way to unlock value fromthe company is either through a strategic option or selling offthe operations," he added, but said neither is likely in theshort term.

RIM has said it would report an operating loss later thisweek as analysts grow increasingly concerned about the company'sability to conserve cash during a painful transition.

Gelblum said RIM would have to spend an increasing share ofthe earnings generated by its valuable subscription-basedservices to support its loss-making devices unit. He said he hadlittle faith that the next-generation BlackBerry 10 devices willsucceed in reversing RIM's decline when they finally launchlater this year.

His scaled-down version of RIM would have just 2,000employees, down from 16,500 currently, ship between 5 millionand 10 million devices a year and collect sharply lowersubscription fees. RIM shipped 11.1 million phones last quarter.

He estimated it would cost the Canadian company $2 billionto cut that many jobs.

The stock closed at $9.11 on the Nasdaq. The 7.6 percentfall is its steepest since late May, when it said it expected toreport an operating loss for its fiscal first quarter and saidit had hired investment bankers as part of a strategic review.

"In a weak market, people tend to sell their weakest stockfirst," said Ian Nakamoto, director of research at MacDougall,MacDougall & MacTier. He said RIM's drop on Monday likelyreflected a combination of the analyst report, nervousness aheadof RIM's financial results on Thursday, and a broader decline inequity markets.